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Current Tax Policy Inhibits Saving April 13, 2007

Posted by federalist in Taxation.
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Henry Blodget suggests that current tax policy makes it surprisingly hard for individuals to preserve their purchasing power through regular savings and investment:

[G]iven current tax policy, it’s no wonder we’re not saving anything.  How could we fix this?

For starters, we could do the same thing for regular savers as we do for real-estate investors: Change the definition of a “realized gain.” Real-estate investors can take advantage of a “1031 Exchange,” which allows them to take gains from the sale of one property and reinvest them in another without triggering a tax event. The same system should apply to other investments: If you own a stock or fund that has doubled, you shouldn’t be forced to hang onto it just to avoid triggering a taxable gain. Instead, you should be able to sell it and invest the proceeds in another stock or fund. Gains should only be “realized” when you take the money out of your investment account and spend it.

Second, to avoid encouraging too much risk-taking, we should treat interest earned in long-term savings accounts as capital gains, not income. This would remove the tax-disadvantages associated with owning safe, income-generating assets as compared to more volatile stocks.

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